SPC00471
Capital gains tax – rollover relief on reinvestment – whether “arrangements for the acquisition of the relevant shares” – repayments from another company controlled by taxpayer of loans made by him – whether a “return of value” denying relief – yes – appeal dismissed

Capital gains tax – rollover relief on reinvestment – timing of issue of shares

THE SPECIAL COMMISSIONERS

	M WAKEFIELD	Appellant

	- and -

	INSPECTOR OF TAXES    	Respondents

				Special Commissioners:   RICHARD BARLOW  (Chair)
							       JOHN CLARK

Sitting in London on 20, 21 and 22 September 2004

Robert Argles, of Counsel, instructed by Chisnall Comer Ismail & Co, Accountants and Registered Auditors, for the Appellant

David Ewart, of Counsel, instructed by the Solicitor of the Inland Revenue, for the Respondents

© CROWN COPYRIGHT 2005

ANONYMISED DECISION

Introduction. 

1.	This is an appeal against assessments to capital gains tax for 1995/1996 and 1997/1998 and during the hearing it was agreed by the parties that the appeal would also determine issues relating to a capital gains tax assessment for 1999/2000.  The sum in dispute is approximately £440,000 and the assessments are partly alternatives to each other.  The parties invited us to make the necessary findings of fact and to determine the legal issues in principle only and to leave it open to them to return to us if the consequences, so far as the assessments are concerned, cannot then be agreed.

2.	The appellant was represented by Mr G Argles of counsel and the respondent was represented by Mr D Ewart of counsel, to both of whom we are most grateful for their assistance.

3.	The matters in dispute arose as a result of the taxpayer, Mr M Wakefield, making large capital gains from his sale of shares in two companies, Vikings Ltd and Centurions Ltd and it is not in dispute that the major parts of those gains were chargeable with capital gains tax.  The appeal relates to the question whether or not Mr Wakefield is entitled to defer payment of the tax on part of those chargeable gains under Chapter 1A of the Taxation of Chargeable Gains Act 1992 (TCGA), which deals with roll over relief on re-investment.  In particular the issue is whether the relief is denied to the taxpayer because of section 164L of TCGA.

4.	Stated briefly, the issue is whether investments by Mr Wakefield of £1,100,000 in shares of Bulls Ltd, which it was agreed were in most respects investments which qualified for the roll over relief, were not to be treated as an acquisition of eligible shares because of section 164L of TCGA.      

The facts.

5.	Most of the facts in this case were agreed by the parties and their agreement was recorded in a Statement of Facts.  We will summarise the agreed facts only so far as is necessary for understanding our decision.  

6.	Mr Wakefield sold shares in Vikings Ltd and Centurions Ltd in July 1995.  The proceeds were £1,935,000 and most of that was a chargeable gain under TCGA.  

7.	Two other companies feature in this case, Bulls Ltd and Rhinos Ltd  Mr Wakefield and his wife owned shares in both companies.  The companies had exchanged their names but we will refer to both as if they had always been called by their names after the exchange.   

8.	At all material times Rhinos Ltd was a property investment company.  Bulls Ltd was a trading company which was a “qualifying company” for the purposes of section 164G of TCGA and therefore for the purposes of the roll over relief.

9.	By April 1996 Mr Wakefield and his wife had acquired one subscriber share each in Rhinos Ltd and Mr Wakefield had subscribed for the remainder of the £100 share capital, fully paid, and he had lent the company £900,000 as loan capital.  The date of the loan is not stated but repayments began on 13 April 1996 according to the agreed facts (some documents refer to 30 April but as the difference is immaterial for the purposes of this case we will not attempt to resolve it).

10.	By April 1996 Mr Wakefield owned £80 and his wife owned £20 of the share capital of Bulls Ltd and by 13 November 1996 the share capital was 1,000 shares of £1 each.  The agreed statement of facts does not say if that capital was fully subscribed or paid by then.

11.	Mr Wakefield controlled both companies and it was agreed by the parties that the two companies were “connected” within the meaning of section 286 of TCGA and that Mr Wakefield was connected with both companies.  It was also agreed that Rhinos Ltd and Bulls Ltd had not engaged in any transactions with each other.   

12.	Potentially relevant transactions between Mr Wakefield and Rhinos Ltd or Bulls Ltd consist of repayments of the loan capital by Rhinos Ltd to Mr Wakefield, which were made on various dates, and either two or three occasions when Mr Wakefield subscribed for shares in Bulls Ltd.  The relevance of these transactions is that the respondent contends that the repayments of the loan capital (or some of them) are arrangements made in relation to or in connection with the acquisition of shares in Bulls Ltd. They contend that those arrangements were made before the acquisition of the share capital in Bulls Ltd.  They contend that those arrangements fall to be treated, by section 164L(3) of TCGA as returns of parts of the value of Mr Wakefield’s investments in Bulls Ltd, with the result that the acquisitions of the shares in that company are not to be treated as an acquisition of eligible shares. 

13.	It is necessary to make findings about the issue of the increased share capital of Bulls Ltd and in particular whether it was in two or three tranches.  Ultimately the relevance of the difference between the parties about this may be limited, as we shall explain, but a finding is necessary.  It is also necessary to make findings of fact about whether the transactions consisting of the repayments of the loans by Rhinos Ltd were included in arrangements for the acquisition of the shares.

Factual issue about the share capital of Bulls Ltd.

14.	On 13 March 1997 Mr and Mrs Wakefield, who were the only shareholders of Bulls Ltd at that time, attended a meeting which was minuted by a minute signed by Mr Wakefield as a director.  A special resolution was passed increasing the share capital from £1,000 to £5,000,000 by the creation of 4,999,000 ordinary shares of £1 each ranking pari passu in all respects with the existing shares.  On 16 July 1997 the company gave notice of that increase in nominal capital to the registrar of companies on a form 123 pursuant to section 123 of the Companies Act 1985.

15.	It was not in dispute that Mr Wakefield had intended to subscribe for additional shares to a value of £100,000 in November 1996 and we find that he did intend to do so.  He transferred £100,000 from his bank account to Bulls Ltd on 13 November 1996 and wrote letters to his accountants and his bank which are entirely consistent with that intention.  Subsequently, he provided a memorandum for the accountant who was drawing up the annual accounts of Bulls Ltd, referring to the subscription of £100,000.  He also entered the shares on the register, which was in his control, showing himself as the holder.  We have no hesitation in finding that Mr Wakefield intended to subscribe for 100,000 ordinary shares of £1 each, fully paid, in November 1996 and that he held an honest belief that he had done so.  The fact that he later signed the annual accounts of Bulls Ltd, in which £100,000 was shown as due to creditors and the share capital was shown as £100, does not make us hesitate about those findings.  Mr Wakefield simply signed the accounts as presented by the accountant.  In fact, unknown to him, the £100,000 had been treated as a director’s loan as the accountant’s note on the memorandum referred to above makes clear.       

Legal issue about the share capital.

16.	Mr Argles argued that, despite the fact that the formal resolution increasing the share capital of Bulls Ltd was not passed until 13 March 1997, we should conclude that the shares had been issued in November 1996.  

17.	He relied upon the case of In re New Zealand Banking Corporation, Sewell’s Case LR III Ch 131 (1868), in which the liquidator of the company had applied to place Sewell upon the list of contributories but the latter objected that at the time he purportedly became a shareholder the relevant shares had not been authorised to be issued.  It was held that special resolutions intended to rectify that fault were valid for that purpose.  However, more to the point for our purposes, Lord Cairns LJ assumed, without deciding the question, that up to the point at which the rectification of the fault had been made, Sewell could have objected to being made a contributory (at page 139).  That case is therefore not authority for the proposition that a company can retrospectively and effectively alter its share capital for all purposes.  It is authority for the proposition that a defective increase in share capital can, in some circumstances, be rectified and that the holders are liable for the consequences of their holding which arise after rectification.

18.	Mr Argles also relied upon In re London and New York Investment Corporation [1895] 2 Ch 860.  In that case the company was held to have been entitled to rectify a “slip” concerning the issue of preference shares provided that it could be done consistently with justice (per Stirling J at page 869).  The decision was based mainly on an interpretation of the memorandum and it may well have been considered that a change that was made in accordance with the memorandum and which only affected the rights of shareholders amongst themselves was not objectionable.  Whether the court would have come to the same conclusion about a change that affected non-members seems doubtful.  It is also a case where the rectification preceded its legal consequences because the winding up, in which the preference shareholders obtained the benefit of the correction of the error, post-dated its correction.

19.	Finally, Mr Argles relied upon National Westminster Bank –v- IRC [1995] 1 AC 119 in which it was held that shares are issued when entered on the register after allotment and notification to the shareholder.  However, that case is authority for the proposition that shares are not issued until entered on the register; not for the proposition that whatever is entered on the register has been issued.  It is not authority for the proposition that shares which do not exist can be created and issued simply by entry on the register. 

20.	We hold that the 100,000 shares could not be issued until they came into existence, which in this case required a resolution.  That resolution was passed on 13 March 1997 which was therefore the earliest date on which they could have been issued.

21.	However, nothing else relevant to the question of the issue of the shares occurred on 13 March 1997, and we hold that the return of allotment dated 23 June 1997, which refers to the allotment of 600,000 shares, establishes the correct date for the issue of the 100,000 shares, as well as the 500,000 which were undoubtedly issued to Mr Wakefield on that date.  

22.	That allotment return refers to the 600,000 shares as if they were a single transaction.  The form allows for different dates to be given for different shares.  The relevant part has printed on it “Date(s) on which the shares were allotted”.  Despite that, all the shares are shown to have been issued as a single transaction on 23 June 1997.

23.	Although the 500,000 and the 100,000 shares issued on 26 June 1997 were both shown as a single transaction in the allotment return we hold that they were two separate transactions as far as the subscription for the shares was concerned and therefore two separate investments for the purposes of Chapter 1A.  That is because, although the payment of £100,000 in March 1997 was partly in error because the increase in share capital had not been authorised, that was none the less a separate payment from the £500,000 made on 26 June 1997 and the two transactions were therefore distinct. 

Facts concerning the transactions for the repayment of the Rhinos Ltd loan and share subscriptions.

24.	We will make our findings of fact first and then determine the legal issues about what “arrangements” are before holding which, if any, of the transactions are arrangements.  The payments from Rhinos Ltd to Mr Wakefield are not in dispute and it will assist understanding of our decision if we now set out in chronological order the potentially relevant transactions, which we can now do because we have decided how many share issues are in question.

Subscriptions for shares in Bulls Ltd    	Payments from Rhinos Ltd to Mr Wakefield.

13 (or 30) April 1996   £296,000  
13 August 1996	 £110,000
22 October 1996	 £120,000
25 June 1997		 £  12,000
	26 June 1997	    £500,000
	26 June 1997      £100,000
30 September 1997	 £  18,000 
17 February 1998	 £  10,000
16 March 1998	 £300,000
	16 March 1998   £500,000
20 August 1999	 £  80,000
4 February 2001	 £  15,000

25.	We have placed the purchase of shares on 16 March 1998 after the payment from Rhinos Ltd in the chronological list because it was admitted by Mr Wakefield that the £300,000 from Rhinos Ltd was, to that extent, the source of the funds used to pay the £500,000 to Bulls Ltd on that date.

26.	The payment of £80,000 on 29 August 1999 from Rhinos Ltd to Mr Wakefield marks the point at which the loan capital of £900,000, lent by Mr Wakefield to Rhinos Ltd, was exceeded by the payments.  Mr Argles said that he was content that we should treat the payments from Rhinos Ltd as being firstly repayment of the loan capital, so that all payments up to and including 16 March 1998 were entirely repayments of loan capital and the payment of £80,000 on 20 August 1999 was partly a repayment of loan capital.  Mr Ewart did not object to that approach. 

27.	The £100,000 Mr Wakefield paid into the Bulls Ltd account in March 1997, as we have held, erroneously believing it to be for a subscription in shares, was funded from a current account which was in turn funded from a withdrawal of funds from a money market account held by him jointly with his wife.  These facts were stated in evidence and supported by documents and we find them to be the case.  There is no evidence to suggest that any of the £100,000 came from Rhinos Ltd.  We find that the £100,000 was not derived from any payment to Mr Wakefield from Rhinos Ltd.

28.	The £500,000, being the balance of the £600,000 we have held to have been subscribed on 26 June 1997, was transferred as a single sum from Mr Wakefield’s current account.  Two payments into that current account were made on 25 June 1997.  The sum of £489,396.96 was paid into the current account from the money market account held jointly with Mrs Wakefield and £12,000 was paid into the account from Rhinos Ltd.

29.	Mr Wakefield said in evidence that he probably had £500,000 available to fund the 26 June 1997 payment and that he could have done so without receiving or using the £12,000 from Rhinos Ltd.  We find that to be the case.  It seems clear that he could easily have obtained a loan of £12,000 even if he did not have ready funds available.  However, he frankly admitted that the £12,000 payment from Rhinos Ltd on 25 June 1997 in fact provided funds to that extent for the purchase of the £500,000 of shares and we so find. 

30.	The subscription for £500,000 in shares on 16 March 1998 was made in part by a payment from Mr Wakefield’s current account of £470,000.  Of that sum it is admitted that £300,000 was paid to Mr Wakefield from Rhinos  Ltd. 

31.	The balance of £30,000 had been transferred from Mr Wakefield’s deposit account on 23 February 1998 first to Bulls Ltd’s business account and then to its business reserve account but we are satisfied, and find, that the original source of the £30,000 was not Rhinos Ltd.  The source is stated on the statement for the deposit account and is not Rhinos Ltd.

32.	Our findings of fact are therefore that the £12,000 and the £300,000 payments from Rhinos Ltd were in part the sources of the funds used to pay the two amounts of £500,000.  

33.	The respondent accepted that the £100,000 paid to Bulls Ltd in November 1996 was not, as a matter of fact, funded by the £120,000 repayment of the loan to Mr Wakefield in October 1996.  It was never suggested that that sum was funded by either of the earlier payments from Rhinos Ltd.

The respondent’s case in outline.

34.	The respondent contends that the payments of £12,000 and £300,000 are “arrangements for the acquisition of [the relevant] shares”.  The respondent also contends that those arrangements amount to the return of part of the value of the investment in those shares, within the meaning of section 164L, so that the whole of both £500,000 subscriptions are disqualified from the roll over relief from the outset by section 164L(1)(c) and (3).  If the subscription for 600,000 shares on 26 June 1997 is a single transaction it is disqualified from relief for the same reasons. 

35.	In respect of the £100,000 paid in November 1996 the respondent contends that, although that sum became a subscription for shares on 26 June 1997 and even if it can be treated as a separate transaction from the £500,000 subscription on the same date (which we have found it can be); the shares ceased to be eligible shares by reason of section 164L(2) when £18,000 was paid by Rhinos Ltd to Mr Wakefield on 30 September 1997 because that payment was a return of value within the meaning of section 164L(3).  If that is right, it would make little difference to the outcome of the case whether the 100,000 shares should be treated as issued in March 1997 or (as we have held) June 1997 as the only effect will be as to the year of assessment in which the transaction occurred and for how long, if at all, the shares were eligible.  Some consequential issues about interest may arise.            

36.	In the alternative, the respondent contends that, if there were no arrangements in respect of the two 500,000 share subscriptions, they ceased to be eligible because of section 164L(2) and (3) when payments were made by Rhinos Ltd which amounted to deemed returns of parts of the investments (namely £18,000 on 30 September 1997 and £80,000 on 20 August 1999).   

37.	The respondent abandoned a separate argument that the issue of 100,000 of the shares issued on 26 June 1997 represented a re-payment of a debt from Bulls Ltd to Mr Wakefield so as to fall within section 164L(2) without reference to 164L(3).  This concession is in accordance with the decision in Inwards –v- Williamson [2003] STC (SCD) 355, as to which see below. 

The appellant’s case in outline.

38.	The appellant contends that upon a proper interpretation of the legislation there was no return of value when payments were made by Rhinos Ltd and that, as the investments in Bulls Ltd were otherwise qualifying investments made in accordance with the requirements of Chapter 1A of TCGA the roll over relief is and has at all material times been available.

39.	The appellant denies that any of the payments amount to “arrangements”.

The interpretation of the legislation.

40.	Section 164L, so far as is relevant, reads-

“(1) For the purposes of this Chapter an acquisition of shares in a qualifying company shall not be treated as an acquisition of eligible shares if the arrangements for the acquisition of those shares, or any arrangements made before their acquisition in relation to or in connection with the acquisition, include-
	(a) … 
	(b) …
(c) arrangements for the return of the whole or any part of the value of his investment to the individual acquiring the shares.

(2) If, after any eligible shares in a qualifying company have been acquired by any individual, the whole or any part of the value of that individual’s investment is returned to him, those shares shall be treated for the purposes of this Chapter as ceasing to be eligible shares.  

(3) For the purposes of this section there shall be treated as being a return of the whole or a part of the value of the investment of an individual who is to acquire or has acquired any shares in a company if the company-
(a) …
(b) repays any debt owed to that individual, other than a debt which was incurred by the company-
(i)  on or after the acquisition of the shares; and
(ii) otherwise than in consideration of the extinguishment of a debt incurred before the acquisition of those shares;
…

(4) For the purposes of this section there shall also be treated as being a return of the whole or a part of the value of the investment of an individual who is to acquire or has acquired any shares in a company if-
(a) there is a loan made by any person to that individual; and
(b) the loan is one which would not have been made, or would not have been made on the same terms, if that individual had not acquired those shares or had not been proposing to do so.  
…

(9) In this section-
(a) any reference to a payment or disposal to an individual includes a reference to a payment or disposal made to him indirectly or to his order or for his benefit; and
(b) any reference to an individual includes a reference to an associate of his and any reference to a company includes a reference to a person connected with the company.

…

(11) In this section –
“arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable;
…

41.	The roll over relief does not require any tracing of the proceeds of sale of the asset on which the original gain was achieved.  A person who makes a gain and wishes to have the benefit of the relief is entitled to invest monies other than those which represent the gain or to re-invest the same monies.  It makes no difference.  It is therefore, in principle, irrelevant to consider whether Mr Wakefield invested the money he made from the sale of the shares in Vikings Ltd and Centurions Ltd directly or indirectly, or not at all, in Bulls Ltd.  The fact that he may have loaned some of the proceeds of the sale of those shares to Rhinos Ltd is, in itself, irrelevant.

42.	It would, of course, be surprising if the relief continued where the “re-investment” had come to an end and various provisions in Chapter 1A provide for that.  Section 164L is designed to prevent what is effectively a return of the re-investment in disguise. 

43.	Had it not been for sub-section (9), section 164L would not, on any view, have had an impact on Mr Wakefield’s investment in Bulls Ltd.  No actual return of the value of his investment in Bulls Ltd occurred by reason of the repayment of the loans to Rhinos Ltd; rather the opposite happened.  The repayment of those loans by Rhinos Ltd partly enabled him to make the investment.  In so far as the repayment of the loans from Rhinos Ltd enabled Mr Wakefield to make the investment in Bulls Ltd they were not in any sense a re-payment of the investment.  In so far as the re-payments of the Rhinos Ltd loan were used to finance the investments in Bulls Ltd they cannot in any ordinary sense be described as a return of the value of that investment.  The investment in Bulls Ltd continues to the present and cannot in any ordinary sense be described as having been returned to Mr Wakefield at all.

44.	Both parties were in agreement that section 164L is an anti-avoidance provision and that is clearly correct.  They did not suggest that that means the provision should be interpreted in any different way than any other statutory provision.  We have to identify the meaning of the words enacted and then apply it to the facts.

45.	Both parties were in agreement that sub-section (3) of section 164L defines what is a return of the whole or part of an investment of an individual.  We have come to a different conclusion about that, although it makes no real difference to our decision.  We hold that the structure of section 164L is to be analysed as providing, in sub-section (1), firstly a provision aimed at a return of value of part or the whole of the investment, giving the words “return of value” an undefined normal meaning, and than extending that meaning, if necessary artificially, by sub-sections (3) and (4), as themselves further extended by sub-section (9).  

46.	It seems clear that the draftsman attempted to make the extended definition as wide as possible and it may well be that sub-section (3) was intended to apply to everything that could possibly fall within the meaning of the phrase “return of value” but, if so, because it is so widely drawn there is a real risk that it will also catch transactions that do not readily fall within that phrase.  The provisions appear to be an example of what Mr J Holroyd-Pearce described thus:

“… the Revenue appear to be uncertain what precisely the target is, and so they fire off an enormous gun in the general direction of where they suppose the target to be in the hope that they will hit something worthwhile.” [1980] British Tax Review at 383.  

It also seems that a general anti-avoidance provision, focussing on the actual intention of the taxpayer, would have afforded Mr Wakefield a defence to any claim that the transactions in this case were avoidance, as they were not avoidance as a matter of fact.

47.	Having made those introductory remarks we will consider the interpretation of the section.  

48.	Mr Argles stressed the mischief which he said was aimed at by section 164L and referred us to Inwards –v- Williamson [2003] STD (SCD) 355 in which the Special Commissioners considered a case where an advanced payment in respect of an acquisition of shares was held not to be a loan to the company in whose shares the payer was to invest, so that when the shares were issued that was not a repayment of a loan under section 164L(3)(b)(i). 

49.	We note that in that case the payment had always been intended to pay for the shares and it is therefore authority for the proposition that the payment, in this case, of £100,000 in November 1996 was an advance payment for the shares that were eventually issued in June 1997 and not a loan.  We do not regard the fact that the accountant described that money as a loan in the company’s annual accounts as altering that conclusion.    

50.	The mischief at which section 164L is aimed is described in paragraph 44 of the decision in Inwards –v Williamson and we agree with Mr Argles that the main intention of section 164L is that the re-investor must have truly increased his investment in the eligible company and must not have had it returned, either directly or indirectly, whether to the investor or to any associate of his.

51.	Mr Ewart argued that, even if the provisions may appear to go farther than the minimum that might be necessary to avoid the mischief aimed at; if that is the correct interpretation of the words used it has to be applied.  He also said that, where payments are made involving associates or connected persons, it is difficult for the Revenue to look behind the payments to establish the true facts and particularly the intentions of the parties.  In such cases there is increased scope for artificial avoidance.  He therefore argued that it would not be surprising to find that transactions which did not obviously fall within the mischief aimed at would none the less be caught by the anti-avoidance provision.

Arrangements.

52.	Turning to the specific provisions in question, the respondent argues that the arrangements made before the acquisition of the shares in Bulls Ltd included the payments from Rhinos Ltd at least of the £12,000 on 25 June 1997 and £300,000 on 16 March 1998.  This brings into question the meaning of the words “arrangements made before their acquisition in relation to or in connection with the acquisition [of the shares]” in section 164L(1).

53.	Mr Argles made it clear that the appellant’s case mainly rested on arguments about return of value but he made four points about arrangements.  

54.	Firstly, he pointed out that section 164L(1) refers to arrangements made before the acquisition of the shares being arrangements for the return of an investment.  He pointed out that the payments from Rhinos Ltd, although they had been arranged before the acquisition of the shares, could in no sense be said to be a return of the investment because the investment had not been made until after those sums were paid to Mr Wakefield.  We agree with Mr Argles about this.  Had section 164L(1) stood alone, we would have held the payments from Rhinos Ltd were not a return of an investment in the ordinary meaning of the word return.  A return in the ordinary sense cannot precede that which it returns. 

55.	Secondly, he argued that before there could be said to be an arrangement for the return of an investment there had to be a connection between the two transactions that the word return implies.  He argued that in this case the evidence was insufficient to establish that the arrangements for repayment were included in the arrangements for the acquisition.   

56.	Thirdly, he argued that the arrangement for the return of the money Mr Wakefield lent to Rhinos Ltd was made when the money was lent i.e. it would be repaid as and when Rhinos Ltd had money available.  

57.	Taking the second and third points together we do not agree with Mr Argles.  There was a clear factual connection between the two payments from Rhinos Ltd to Mr Wakefield and the payments for the shares to which they contributed.  The fact, if it is a fact, that he could have arranged things differently and paid for the shares from other funds available to him is neither here nor there when considering whether the payments from Rhinos Ltd were in fact parts of the arrangements for the acquisition of the shares.  We can only examine the facts that exist and decide whether they amount to arrangements.  The payments from Rhinos Ltd were part of the arrangements for the acquisition of the shares for which they provided funds.  That says nothing about whether the payments from Rhinos Ltd to Mr Wakefield were also returns of an investment but so far as the “arrangements” point is concerned we are against Mr Argles. 

58.	Fourthly, Mr Argles relied upon sub-section (11), which partly defines arrangements in terms which he argued imply a single scheme, agreement or understanding whereas here there were two separate schemes, agreements or understandings; one between Mr Wakefield and Rhinos Ltd and one between Mr Wakefield and Bulls Ltd.  We do not agree with this contention.  A scheme, agreement or understanding is obviously capable of encompassing several elements.     

59.	We did not understand Mr Ewart to disagree with the proposition that, if section 164L(1) had stood alone, the appellant would have succeeded.  Mr Argles’ first point, though we have agreed with it, does not resolve the questions we have to decide and so we have to consider section 164L(3) and (9).

Return of value.

60.	The form of sub-section (3) is that certain things “shall be treated” as being a return of value.  The words “shall be treated” themselves imply that what is referred to, is not, or at least is not necessarily, already encompassed within that which it is to be treated as.  “A is to be treated as B” does not imply that A would be B anyway, if it would, the provision would be unnecessary.  The definition clearly intends to enlarge what would otherwise be the return of value and the real question for us to decide is whether the transactions contended for by the respondent fall within the provision.

61.	The respondent relies upon paragraph (b) in sub-section (3) which, so far as is relevant, reads “if the company … repays any debt owed to that individual”.  The individual is the investor and in this case that means Mr Wakefield.  Rhinos Ltd did repay him a debt each time it made payments to him up to and including the £80,000, paid on 20 August 1999.  The essential question is whether Rhinos Ltd falls within the phrase “the company” in that provision.

62.	Mr Argles pointed out that although sub-section (9) says that any reference to a company in the section “includes a reference to a person connected with the company”; that cannot be taken quite literally.  Section 286(5) of TCGA provides that a company can be connected with another company and so the person connected may be another company.  

63.	However, taking the opening words of sub-section (3) as an example and as the relevant words to be construed in this case, they are: “there shall be treated as being a return … of an investment of an individual who is to acquire or has acquired any shares in a company if the company [does certain things]”.  If sub-section (9) is to be read entirely literally it could be said that the concluding words just quoted should be read as “there shall be treated as being a return … of an investment of an individual … in a company or connected company if the company or connected company [does certain things]”.    

64.	Mr Argles pointed out that an investment in a connected company would be entirely irrelevant, as the only question which arises under section 164L is whether the investment actually made is disqualified from being an acquisition of eligible shares.  Given that any investment in shares must be an investment in shares in a particular company it is irrelevant to add the words connected company after the first reference to a company in the opening words in sub-section (3) because that reference can only be to the company in whose shares the investment is made.  He then developed that argument by saying that the second reference to the company in the opening words must refer back to the same company as the one first referred to, which must therefore be the company whose shares have been bought and the reference is not extended to the connected persons.  That argument would, if correct, make the payments from Rhinos Ltd irrelevant and the appeal would succeed. 

65.	In support of that argument Mr Argles referred to Customs and Excise –v- Savoy Hotel [1966] 2 All ER 299 in which Sachs J declined to hold that the word “including” was intended to enlarge the definition of manufactured beverages so far as to encompass freshly squeezed orange juice even though “including” was followed by the words “fruit juices”.  Sachs J said he would apply a modicum of common sense. 

66.	However we do not consider that case helps the appellant very much, if at all.  The word “includes” in sub-section (9) is clearly intended to extend the references to associates and connected persons in some way and an application of the conclusion in the Savoy case would give it no weight or purpose at all.  Indeed, Mr Argles did not go so far and he limited his argument to a suggestion that the sub-section should be read in the context and be regarded as subordinate to and dependent on the other provisions of the section.  

67.	He argued that “includes” in sub-section (9), and therefore the extension of the disqualifying transactions to those made by connected companies, should be limited in both of two ways.  Firstly it should be limited to cases where the context requires it and secondly it should be limited to cases where the payments by connected persons fall within sub-section (9)(a) as well as (9)(b).

68.	As to the first of these contentions we agree that sometimes the context does show that a reference to a company cannot include references to another company, even one connected with it, as for example the first reference to company in the opening words of sub-section (3) where only one company can possibly be referred to.  On the other hand the context cannot easily be said to depend on the actual facts of a particular case.  The statute must have a meaning which is applicable either universally or at least to a definable range of cases and its meaning cannot vary depending on the facts of the case.

69.	Mr Argles’ second proposition, that paragraph (b) of sub-section (9) only applies if paragraph (a) also applies, comes closer to providing a way of identifying the cases in which a payment by a connected company should not be treated as a disqualifying payment i.e. where it does not also amount to a payment to an individual.  This would depend upon paragraphs (a) and (b) being cumulative but we do not agree that it would assist the appellant, even if we interpreted that provision in that way, because on the facts of this case there would still be a payment to Mr Wakefield whenever Rhinos Ltd made a payment to him.  Interpreting paragraphs (9)(a) and (9)(b) as cumulative would not affect that.    

70.	What would be required to assist the appellant and anyone else in his position, which we fully accept is that of someone who is caught by a provision that was not aimed at a person in his situation, would be a holding that the provisions of sub-section (3), even as extended by sub-section (9), only apply to cases where an actual return of investment has occurred.

71.	The principle of the ‘potency of the term defined’ as described in section 199 of Bennion Statutory Interpretation (4th ed Butterworths 2002) comes close to providing the answer and indeed it is the principle used by Sachs J in the Savoy case.  Where a term is defined by a definition which specifies examples of the intended meaning; none the less the actual meaning of the term being defined influences the meaning to be attached to the term as extended.  An example of the principle is Esso Petroleum –v- Ministry of Defence [1990] Ch 163 where the Court held that although dividends were defined for certain purposes as including “interest”, interest on damages in tort was so far removed from the meaning of dividends that the definition was not to include it.

72.	Any application of that principle would be impossible if sub-section (3) is an exhaustive definition of return of value, as the parties contended is the case.  We have held that it is not an exhaustive definition but we hold with some reluctance that the principle of the potency of the term defined does not apply in this case.  The words “shall be treated as” in sub-section (3) make it clear that what is intended is that transactions falling within the words used in sub-section (3) are a return of value for the purposes of section 164L whether or not they could otherwise have carried that meaning.  The breadth and apparent artificiality of some of the items included in sub-section (3) remove any real force in a suggestion that they can be read as limited to actual returns of value.  We therefore hold that sub-section (3) does require the fictitious returns of value to be treated as disqualifying the investments of both sums of £500,000 from the relief.

73.	It is also the case that if we accepted the appellant’s contentions that an actual return of value is needed even where a transaction clearly falls within those described in sub-section (3) there would be cases where transactions involving an actual, but indirect, return of value would not be caught.

74.	We were also addressed in detail by Mr Argles about cases concerning purposive construction of statutes.  He referred to the absurdity resulting from the respondent’s interpretation of the legislation, and cited examples in which a minimal payment by a person connected with a company would result in loss of relief.  Mr Ewart argued that the fact that legislation might well catch “innocent transactions” did not thereby make it absurd.  The statute imposes an extremely rigorous test.  The relief is not reduced pro rata and limited to the value of the deemed repayment, as it is in some similar situations relating to income tax.  This had been a deliberate decision by Parliament, avoiding the need for transactions between connected persons to be investigated to discover their intentions.  The section simply amounts to a rule; if the taxpayer does not fulfil the requirements of the rule, he does not qualify for the relief.

75.	We accept Mr Ewart’s contention.  This interpretation may produce anomalous results in certain circumstances, but it does not amount to an absurdity.  The authorities cited by Mr Argles did not persuade us that we could depart from what we hold to be the clear wording of sub-section (3) and although we have accepted that Mr Wakefield finds himself in the unfortunate position of having lost the advantage of deferment of the tax in question because of a statutory provision primarily aimed at transactions of a type he did not carry out, it is our conclusion that the provision can only be interpreted in that way.  We would add that we fully accept that Mr Wakefield acted properly throughout and had no intention of taking an unfair advantage of the relief which ought, on any fair view of the intentions behind Chapter 1A, to have been available to him.

Conclusions.

76.	Our conclusion is therefore that the payments of £12,000 on 25 June 1997 and £300,000 on 16 March 1998 by Rhinos Ltd to Mr Wakefield mean that the two investments of £500,000 made on 26 June 1997 and 16 March 1998 cannot be treated as acquisitions of eligible shares for the purposes of Chapter 1A of TCGA by reason of section 164L(1), (3)(b) and (9).

77.	We hold that the payment of £100,000 for shares issued on 26 June 1997 was a separate payment from the £500,000 paid on that day and that that payment was a payment for eligible shares when made but ceased to be a payment for eligible shares on 30 September 1997 by reason of the payment of £18,000 on that date from Rhinos Ltd to Mr Wakefield and by reason of section 164L(2), (3)(b) and (9).  

78.	If our conclusion at paragraph 76 is incorrect, the two payments of £500,000 would cease to be for eligible shares on 30 September 1997 and 20 August 1999 respectively for the same reasons as we have held to be the case in respect of the £100,000.

79.	Although the effect of our decision is that the appeal fails we leave it open to the parties, on the application of either of them within three months of the release of this decision, to have the appeal re-listed for further argument as to the consequences of our decision if they cannot be agreed.  We direct that the parties should jointly inform the clerk to the Special Commissioners if the remaining matters have been agreed.  We give liberty to apply. 

RICHARD BARLOW

JOHN CLARK

SPECIAL COMMISSIONERS

Release Date: 13 December 2004

SC 3013/2004